How to Use Them To Your Advantage

Most of the time when examining places to travel, I look at adventure, cultural or the cost to travel there in making my decision. There’s good deal to fly to Europe? Sign me up. There’s a great surfing spot in Costa Rica? I’m already packing my board shorts. Never seen Angkor Wat? Let’s check it out. I’ll figure out the other stuff when I get there.

However, a different way to travel is to look at the other stuff before, like how much your money is going to buy for you once you get there. To figure that out, you’re going to need to look at exchange rates.

Hopefully you can find a place with warm weather

Think about exchange rates like this: if you want to buy a BMW, but your local dealership only takes Euros, you would have to buy Euros to buy that sweet M3. The more people that wanted M3s, the more people would swap U.S. dollars for Euros and the price of Euros would increase as the demand for Euros increased.

Now, all of that goes on in the background. Someone down the line already paid Euros for that BMW so that you can use dollars, which are so much easier to come by in Topeka, Kansas. So, when you buy a foreign good, as long as the foreign exchange rate is allowed to float freely, the value of the foreign currency goes up. (So, the same would go for foreign investment, foreign real estate, foreign tourism, etc. as well as other internal considerations that can move exchange rates like inflation for each country.)

Freely floating is the key though as some currencies are kept artificially low so that the country’s exports will stay cheaper relative to the same product abroad. (I should say assuming the products are the same, which we know isn’t true, but is a convenient assumption. Perfectly substitutable might be a better way to phrase it, saying, for example, a t-shirt is a t-shirt.)

So, with that discussion out of the way, now is the time to look at exchange rates as they relate to travel. Let’s say you want to fly to Norway. Right now, the exchange rate is 5.58 kroners for a U.S. dollar. Great. Swell. Now, what does that mean?

To get an idea, we can look at a product that is actually the same (well perfectly substitutable) in every country to get an idea of what that exchange rate means. Let’s go to the Big Mac Index!

According to the index, a Big Mac is 45 kroners. Wow. Dividing 45 by the exchange rate gives us about $8 for that Big Mac. Yikes. I would say that must have to be a tasty Big Mac, but it’s the same one we would get for about $3.73 here. But, because of the exchange rate (and the standard of living in Norway – a big catch all term I’ll insert here to explain differences in prices across countries due to wages, taxes, etc.) it costs twice as much.

On the other hand, a Big Mac costs 13.2 Chinese Yuan. The exchange rate is 6.57 Yuan per dollar. Doing the math on this one, we get a price of $2 for a Big Mac, or about half price compared to a U.S. version and a quarter of the price of a Norwegian one. That sentence alone should let you know that buying meals while traveling in China would be much less than buying food in Norway.

So, now that we have an idea of what to do with exchange rates, let’s take a closer look at the Big Mac Index. As of last year (and looking at the table of current exchange rates or this converter) three places to find the cheapest Big Macs (and therefore the cheapest places for travel) are Ukraine, Sri Lanka and Egypt to go along with China. Looking at that list, with all the upheaval in Egypt, you realize that exchange rates, like any consideration, are just one part of the fun travel puzzle: they just give you another tool in your decision arsenal. Have fun and be safe in your travels this summer.

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About Jason McClain
Jason is an aspiring novelist, which means there is a lot of time to put off writing and watch baseball or go fly-fishing, hiking and traveling. By "a lot of time", Jason means "procrastination."

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